The Longest 30 Minutes

Many of you remember those historical analysis showing how the US dollar generally underperformed most other currencies during Fed tightening cycles. Depending on which “USD Index” you're using, some analysis showed the USD peaked at the first hike of the cycle, or shortly after. Here is a not-so recent analysis. While there is a 13% chance of a 50-bp rate hike (surprised it's this low), the most likely scenario for today's FOMC outcome is a 25-bp rate hike with a clear step-up in the Dot Plot forecasts for the Fed Funds rate, followed by a neutral-to-hawkish press conference from Jay Powell. What about the number/magnitude of Fed hikes between now and July? Or, balance sheet normalization?

Currently, markets are pricing five 25-bp rate hikes for the year, with over 50% chance of a 50-bp rate move in one of the meetings. We could expect a clear hawkish adjustment to these expectations in the dot-plot (7 hikes), which should quickly eliminate any immediate USD-pullback from the 25-bp announcement. But there is always the press conference.

Any dovish market interpretations will likely emerge from Powell stating his preference towards balance sheet roll-off rather instead of active selling of assets. This latter option should get a mention in the Q&A. Like I always said, market defining developments have usually emerged 10-15 mins into Powell's Q&A. This could entail a hawkish counterbalance to the mere 25-bp hike in the midst of +8% inflation-- in the form of suggesting Powell is open for an intermeeting rate hike next month (no scheduled meeting in April).

All of the above should make the 30 minutes between the release of the Fed statement/Dots and the press conference a very volatile half-hour. But these swings could pale in comparison to the habitual clinching moment in the Q&A. 

And if you think that by Thursday you got the Fed and US dollar figured out, think again. Not only we should hear more news about a possible ceasefire/agreement between Russia and Ukraine, but also from two Fed speakers later in the week (Barkin and Bowman), followed next week by Daly and Williams as well as a more detailed speech from Powell next week to the all-important National Association of Business Economists, where he will be less swayed by the opinion. 

The combination of these forces with the broadening reality that any pullback should help cap the US dollar against most currencies (not JPY), while metals and indices will face a more complex course. We've already told our WhatsApp Broadcast Group members, which pairs are more likely to stand the test of FOMC-day as well as any tactical positioning in gold.